Ian Cowie was named Consumer Affairs Journalist of the Year in the
London Press Club Awards 2012. He has been head of personal finance at
Telegraph Media Group since 2008, having been personal finance editor
since 1989. He joined the paper in 1986. He is @iancowie on Twitter.

Senior debt alert: 250,000 pensioners with unpaid mortgages

Is your mother or father – or grandma or grandad – turning into a secret PUTHID? You may well say, who they? Pensioners Up To Here In Debt; that’s who.

PUTHIDs are a new and growing social phenomenon. Nearly 250,000 people over State pension age now have unpaid mortgage debt, according to no less an authority than the English Housing Survey by the Department of Communities and Local Government (DCLG). Phew!

More than half of all homebuyers aged over 50 – many of whom retired early – also have mortgage terms that stretch beyond 65 and two thirds of them say they intend to remain in debt indefinitely. Some of these baby boomers seem to be carrying the live-now, pay-later laxity of their pothead youths into a PUTHID retirement.

Financial advisers are divided about whether this is fresh evidence that Britain is drowning in debt or a canny option for people who find themselves short of cash in old age. Melanie Bien, a director of independent mortgage broker Private Finance, said: “In an ideal world, most of us would undoubtedly prefer to have paid off the mortgage well before retirement.

“But the reality is that an increasing number of homeowners are carrying on with their mortgages even after they have stopped working, enabling them to purchase a cheaper property, support a reasonable lifestyle and, increasingly, help their children and even their grandchildren with their own property purchases.

“Rather than paying off the mortgage and downsizing to a smaller home, retirees are using the cash raised to support themselves, and their families. With pensions becoming less attractive and first-time buyers struggling to get on the housing ladder, older relatives can use the equity they have built up in bricks and mortar over the years to help the younger generation. In other words, it is an advance on the inheritance for youngsters who may have otherwise come into the money some years down the line, which could avoid inheritance tax (IHT) as well.”

But David Hollingworth of London & Country Mortgages pointed out: “Borrowing beyond retirement on a standard mortgage will require monthly payments to be made that will sap income. It is therefore a trade off between the need for capital and the level of disposable income left after servicing the mortgage debt.

“It is becoming increasingly difficult to borrow into old age as lenders have tightened their criteria. The typical maximum age is now 75 and lenders also want to be sure that the mortgage will be affordable beyond retirement age.”

Conventional mortgages have much lower interest rates than equity release schemes or home income plans – which typically charge 6.5pc or more – because the latter require no monthly interest payments nor any capital repayment until the borrower dies. So PUTHIDs can argue there is no point in paying off their conventional mortgage if they run out of cash later and need to take out a more expensive home income plan.

Sue Anderson of the Council of Mortgage Lenders said: “People are increasingly taking a more strategic view of their housing wealth, and do not necessarily expect or aim to be mortgage-free either before they retire, or even after.

“This is an entirely rational response to the way in which the economy, and life, has changed in recent decades. Not only are the “Bank of Mum and Dad” tending to pass on their housing wealth to their children earlier than previous generations did on inheritance, but the costs of later life are increasingly being funded through the release of housing equity, whether by choice and the desire for a better lifestyle, or by necessity to supplement other income.”

Unfortunately for prospective PUTHIDs, regulatory pressure is mounting to deter lenders from granting conventional mortgages with terms extending beyond State pension age in future. Ray Boulger of mortgage brokers John Charcol said: “Before the credit crunch, credit-worthy borrowers had no difficulty securing a mortgage past 65, especially as in most cases the loan to value required was well below 75pc. Mortgages into retirement were readily available provided the applicant could demonstrate it was affordable, which in most cases meant demonstrating an adequate pension income.

“Partially as a result of tightening criteria because of the credit crunch, but also because of pressure from the Financial Services Authority (FSA), none of the major lenders will now offer a mortgage which extends beyond the age of 75 and some lenders have a maximum age of 65 or 70 – especially for employed as opposed to self-employed borrowers.”

Most people of this age are quite capable of deciding for themselves what do do with wealth they have accumulated in bricks and mortar. This is a valuable freedom for many who have been horribly disappointed by pensions, annuities and returns on bank or building society deposits during a dismal decade for stock markets and savers’ rates.

But there is no escaping the fact that PUTHIDs are vulnerable to serious risks that need not worry peers how have paid off all their debts. For example, interest rates are now near historic lows. What happens when they go up? Unlike younger debtors, PUTHIDs are unlikely to be able to work overtime or strive harder to earn better bonuses.

So the trend toward living beyond our means even after we have stopped working is a disturbing one. The PUTHIDs of today could be taking more risks with their wealth than they did with their health in their happy hippy days as potheads.